A $4 Billion-Dollar Loss.

Bill Parrott |

Bill Ackman of Pershing Square Holdings recently sold his position in Valeant Pharmaceuticals realizing a $4 billion-dollar loss.  Valeant peaked in July of 2015 at a price of $257.53 and is currently trading around $11.  From peak to trough Valeant lost 95% of its stock market value.   For Valeant to return to its all-time high it will need to generate a return of 2,236%!

$4 Billion is a big number.  In fact, Mr.  Ackman could have given $12,500 to everyone in America.  A family of four would receive $50,000.   The gift from Mr. Ackman would’ve been tax free since the IRS allows individuals to give away $14,000 per person, per year to as many people as one wants.   Think of the good will Mr. Ackman could have generated. 

In the United States, there are currently 5,272 publicly traded companies with a market cap of $4 billion or less.

4 billion seconds is the equivalent of 126.8 years.

During the heyday of Valeant, a client called to inquire if we should add the company to his portfolio.  After a quick visit to a few financial websites and some clicks on my trusted HP12C, I recommended we not purchase Valeant.   I’m thankful he doesn’t own it in his portfolio today.

What should you do if you’re in a situation where one of your investments has turned sour.  Here a few suggestions.

1.       Cut your losses.  A small loss can turn into a large loss quickly.  It’s not easy to take a loss but your goal as an investor is to live to see another day.  

2.       Limit your holdings.   If you purchase individual stocks, limit your exposure to 3% to 5% for each company in your portfolio.  In the event your golden idea turns into a lead balloon, you can sell your holding and move the money into a new investment.  It’s easier to sell a stock when it is 3% of your portfolio versus 53%.

3.       Replace it with an index fund.  If you no longer like your stock but love the sector, consider buying an index fund.  Instead of buying one stock, buy a few hundred through an index fund.  In the case of Valeant, Mr. Ackman could have purchased the Vanguard Health Care ETF. 

4.       Don’t get married to a company.   Don’t let your love for a company cloud your vision to what is happening to the stock price.  A good company can be a bad stock and vice versa.  There are plenty of other fish in the sea.

5.       Offset your gains with losses.  In the unfortunate event you must take a loss use it to offset your gains.   You can offset gains with losses.

This is a big public loss for Mr. Ackman but, at the end of the day, he’ll be fine.  The Valeant story will make for a great business school case study at some point.  Hopefully we can all learn a thing or two from the Valeant trade.  To be a successful investor it’s important to study both winning and losing trades.

Blessed are those who find wisdom, those who gain understanding… ~ Proverbs 3:13.

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

March 15, 2017